As a congressman, Barney Frank coauthored the most important overhaul of banking regulations in a generation: Dodd-Frank, the 2010 law passed in the wake of the global financial crisis and designed to guard against excessive risk-taking by bankers.
Now the former US representative from Massachusetts finds himself on the side of the industry. Until Sunday, he was a board member of Signature Bank, which was taken over by regulators after it pursued what critics describe as a risky strategy of courting customers invested in cryptocurrency. Frank has also this week faced criticism — which he called unfounded — that he had advocated for watering down the landmark law that bears his name.
In an interview Tuesday, Frank defended Signature’s business and said it was seized due to an overreaction by a New York state regulatory agency following the collapse of another financial institution, Silicon Valley Bank, last Friday. He also disputed his critics’ claim that he had supported a 2018 law, signed by then-president Donald Trump, that weakened key provisions of Dodd-Frank.
Regulators seized control of Silicon Valley Bank and Signature Bank after customers suddenly withdrew billions of dollars of deposits last week, and regulators determined the banks could collapse if the withdrawals continued.
The two banks, based in California and New York, respectively, had some features in common that made them vulnerable, industry observers said. Both had exceptionally high levels — approximately 90 percent — of uninsured deposits, that is funds belonging to a single customer in excess of $250,000, the federal cap for insuring deposits.
And both banks had a high proportion of customers from high-risk industries — tech in Silicon Valley’s case and cryptocurrency in Signature’s. Silicon Valley Bank had also invested a significant portion of customer deposits in long-term bonds, whose value had declined as the federal government hiked interest rates in the past year, making it harder for the bank to meet customer demands for withdrawals.
Signature, which had accepted crypto token deposits since 2018, was affected by an erosion of confidence in cryptocurrency after the bankruptcy of FTX, a cryptocurrency exchange, last November and the announced liquidation of Silvergate Bank, a cryptocurrency-focused bank, this month.
Frank said Signature “got hurt” when nervous customers rushed to withdraw their deposits Friday. Then, over the weekend, the New York Department of Financial Services stepped in to shut the bank and hand the reins to the Federal Deposit Insurance Corporation as a receiver.
The New York regulators “said they had problems with our data,” Frank said. “I don’t think that’s a reason you shut people down.”
A Department of Financial Services spokesperson said that following the bank run, Signature “failed to provide reliable and consistent data, creating a significant crisis of confidence in the bank’s leadership.”
Frank also alleged that bias against cryptocurrency may have played a role in the New York regulators’ decision to shut down Signature. “I thought it was an anti-crypto thing,” he said.
The DFS spokesperson said, “The decisions made over the weekend had nothing to do with crypto.”
Frank has faced criticism this week for allegedly supporting a 2018 bill that eased regulatory oversight of medium-sized banks, such as Signature, while serving on Signature’s board. But Frank pushed back on Tuesday, citing a 2018 CNBC op-ed he wrote criticizing the final form that bill took. “Why I would vote ‘no’ on Senate bill to amend Dodd-Frank,” the headline said.
The central dispute — back in 2018 and the current controversy — is the question of which banks are so big, and so important to the broader financial system, that they must be subjected to heightened regulatory scrutiny.
The original Dodd-Frank law set that threshold at $50 billion in assets. Banks above that limit faced strict reporting requirements, were subjected to stress tests to see if they could withstand a severe economic downturn, and had to create plans for how they would safely wind down operations in the event of a collapse. Regulators were also more likely to require them to keep greater amounts of reserve capital on hand.
Frank said Tuesday that he always thought the $50 billion threshold was too low. It placed too great a burden on smaller banks, which inhibited competition. He said Tuesday that he called for an increase of the threshold in 2013 at a conference held at the Chicago Federal Reserve. “I’d never heard of Signature Bank at that time,” he said.
He joined Signature’s board in 2015 and earned $2.4 million in stocks and cash while serving there, Frank said.
Signature was under the Dodd-Frank threshold in 2015, with less than $29 billion in assets, according to Federal Reserve statistics . During Frank’s time on the board, the bank’s assets more than tripled to more than $110 billion as of last week, according to the FDIC .
In 2018, as the bill amending Dodd-Frank was being considered, Frank advocated raising the $50 billion threshold. He wrote in the CNBC op-ed that $125 billion would be reasonable. He argued that the effect of raising the threshold to that level would be substantively “neutral,” and politically beneficial, undercutting some criticism of Dodd-Frank and helping to safeguard the law’s future.
But when Republicans pushed for a $250 billion limit, he balked. “I believe that the price the Republican colleagues are demanding is too high,” he wrote at the time.
Senator Elizabeth Warren, in recent days, has sharply criticized the 2018 law and said that leaving the $50 billion threshold in place could have prevented the collapses of Silicon Valley Bank and Signature Bank.
“President Trump and congressional Republicans’ decision to roll back Dodd-Frank’s ‘too big to fail’ rules for banks like [Silicon Valley Bank] — reducing both oversight and capital requirements — contributed to a costly collapse,” she said in a statement Friday.
On Tuesday, Warren and other Democratic legislators introduced a bill to repeal the portion of the 2018 law that raised the asset threshold.
Mark Williams, a Boston University finance professor and former Federal Reserve bank examiner, said raising the threshold had caused “a reduction in bank oversight.” But he said decisions at the banks themselves were more significant factors in their failures than regulatory changes.
Both banks allowed their uninsured deposits to grow to extraordinarily high levels, Williams said. And both aggressively pursued clients in high-risk, high-reward sectors, he said. (Signature also had customers in a wide range of other industries, the Department of Financial Services spokesperson said.)
“They bet that those industries would continue to take off and that the industries’ success would be their success,” he said. “It was a very risky decision.”
Signature “changed its risk profile in a very short time,” Williams said, referring to the bank’s pivot in recent years toward cryptocurrency. “This was a staid bank that turned into a more risk-taking bank and it was clearly to seek greater profit.”
Mike Damiano can be reached at firstname.lastname@example.org .